The question in the headline is of major significance in estate planning. As readers are aware, the taxable component of a death benefit paid to a person who is not the deceased’s death benefits dependant, as defined in the ITAA 97 (an “ITAA Dependant”) is subject to tax at up to 17%, including the Medicare levy. In contrast, a member benefit is non-assessable, non-exempt income when paid to (or in respect of) a fund member who has attained age 60. The death benefits tax on non-ITAA Dependants poses significant estate planning challenges, particularly when passing superannuation from the surviving member of a couple to their adult children.
As a consequence of an obscure provision of the ITAA 97, however:
A lump sum paid after a fund member’s death in response to a withdrawal request made during their lifetime – while apparently within the definition of “death benefit” – is taxable as a member benefit of the deceased.
Although these circumstances currently arise mainly by accident (due to the member’s sudden death before the withdrawal request could be processed) legitimate succession strategies exist in which a payment of that kind can be planned. This expands the scope of the well-known strategy of a fund member seeking to make a lump-sum withdrawal shortly before their death; providing a “safety valve” in case they get the timing wrong.
The member’s benefit may be paid from their fund direct to a discretionary trust after their death, to avoid (in most States) the risk of their superannuation being subject to a will challenge, while also providing asset protection for the beneficiaries.
The principle on which the first proposition, above, is based also supports the argument that an apparent death benefit paid under a binding death benefit nomination is in fact a member benefit. This argument needs to be tested.
Full details will be contained in a further article, to be published shortly.
Director, Fortuna Legal Pty Ltd